January 27, 2006 - The Temasek-Shin Corp deal was structured to be complicated and achieve two objectives: Enable the parties to avoid transaction taxes and keep Shin’s foreign shareholding within the statutory limits. It has long been known that Advanced Info Service Plc (AIS) is the jewel in the Shin crown.

Singapore Telecommunications had appeared to be the most promising partner for Thailand’s biggest mobile-phone firm. Yet, when it showed up in 1999, it could buy only 19.26 per cent of AIS as the Shinawatra family was not willing to relinquish control of the company at the time.

Seven years later though, and the family was ready to part ways with the telecom giant. But a restructuring of the family business meant the Shinawatra clan now controlled AIS through their holdings in Shin. Thus, it was Shin that would need to sell its 42.86 per cent stake in AIS.

The problem was company-to-company transactions are subject to tax. So it was necessary to have all five members of the Shinawatra and Damapong families sell their combined 49.6 per cent stake to Temasek Holdings because individual transactions are not subject to tax.

As Prime Minister Thaksin Shinawatra noted, Shin is not a dessert. Given its size, it was not going to be easy to find a buyer with deep-enough pockets to purchase it.

That might explain why the Securities and Exchange Commission relieved Shin’s buyers of the obligation to make a mandatory tender offer for all the holding company’s listed subsidiaries.

Together with the Bt73.3 billion paid out yesterday, the buyers need to come up with another Bt79 billion for the remaining shares of Shin. Though a tender also had to be made for AIS shares, it is clear from the low price it offered that Temasek does not want to buy the remaining shares in the company.

The deal could thus be completed with an investment of Bt154 billion. If it were to tender for Shin Satellite and iTV, the cost of the transaction could have swelled to over Bt280 billion. That is a huge amount of money, equal to nearly 10 per cent of Temasek’s investment portfolio of S$103 billion.

It becomes understandable then why the legal infrastructure needed to be in place to ensure that the buyer could afford to purchase Shin, otherwise the hard-to-find investor might have walked away.

In a similar fashion, the Telecommunications Act needed to be amended for the transaction to be completed. As a result of the amendment, the foreign shareholding limit in a Thai telecom firm was raised from 25 per cent to 49 per cent.

However, as some Shin shares were already in the hands of foreigners, the 49.6 per cent stake to be sold to Temasek would still have lifted Shin’s foreign ownership above the statutory limit.

That explains the emergence of a number of nominees on the scene. Aspen Holdings, Cedar Holdings and Kularb Kaew were established two weeks before the deal was to be done. Although Kularb Kaew is owned 51 per cent by two Thai investors, one of them, Pong Sarasin, has already admitted he is just a proxy. Pong and Supadet Poonpipat’s holdings were simply Temasek’s attempt to make Kularb Kaew a Thai company.

Still, as a Thai company, Kularb Kaew together with Siam Commercial Bank, hold a combined 51 per cent of Cedar, making Cedar a Thai company. As a result, despite Cedar’s holding of 38.6 per cent in Shin, the foreign shareholding limit in Shin was not breached.

An investment banker said that no matter which securities firm had been hired to handle the deal, a similar legal structure would have been employed, as it shields the sellers from tax and legalises Temasek’s holding in Shin.

While the deal may be legal, the public is still questioning the morality of the share transfers.

It might not be surprising when businessmen employ such legal manoeuvring to circumvent what can be regarded as the spirit of the law – but when it’s the family of the prime minister, who is supposed to be the first to uphold the laws, serious questions must be asked.